DERIVATIVES

Commodity Derivatives

We have entered into various types of derivative transactions covering some of our projected natural gas and oil production. These transactions are intended to reduce our exposure to market price volatility by setting the price(s) we will receive for that production. Our decisions on the price(s), type, and quantity of our production subject to a derivative contract are based, in part, on our view of current and future market conditions. As of June 30, 2016, our derivative transactions comprised the following hedges:


•	Swaps. We receive or pay a fixed price for the commodity and pay or receive a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.


•	Basis Swaps. We receive or pay the NYMEX settlement value plus or minus a fixed delivery point price for the commodity and pay or receive the published index price at the specified delivery point. We use basis swaps to hedge the price risk between NYMEX and its physical delivery points.


•	Collars. A collar contains a fixed floor price (put) and a ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the call and the put strike price, no payments are due from either party.

•

Three-way collars. A three-way collar contains a fixed floor price (long put), fixed subfloor price (short put), and a fixed ceiling price (short call). If the market price exceeds the ceiling strike price, we receive the ceiling strike price and pay the market price. If the market price is between the ceiling and the floor strike price, no payments are due from either party. If the market price is below the floor price but above the subfloor price, we receive the floor strike price and pay the market price. If the market price is below the subfloor price, we receive the market price plus the difference between the floor and subfloor strike prices and pay the market price.

We have documented policies and procedures to monitor and control the use of derivative transactions. We do not engage in derivative transactions for speculative purposes. For our economic hedges any changes in fair value occurring before maturity (i.e., temporary fluctuations in value) are reported in gain (loss) on derivatives in our Unaudited Condensed Consolidated Statements of Operations.

At June 30, 2016, we had the following derivatives outstanding:



Term	Commodity	Contracted Volume	Weighted Average Fixed Price	Contracted Market
Jul’16 – Dec’16	Natural gas – swap	45,000 MMBtu/day	$2.596	IF – NYMEX (HH)
Jan’17 – Dec'17	Natural gas – swap	60,000 MMBtu/day	$2.960	IF – NYMEX (HH)
Jan’18 – Dec'18	Natural gas – swap	10,000 MMBtu/day	$3.025	IF – NYMEX (HH)
Jan’17 – Dec'17	Natural gas – basis swap	20,000 MMBtu/day	$(0.215)	IF – NYMEX (HH)
Jan’18 – Dec'18	Natural gas – basis swap	10,000 MMBtu/day	$(0.208)	IF – NYMEX (HH)
Jul’16 – Dec'16	Natural gas – collar	42,000 MMBtu/day	$2.40 - $2.88	IF – NYMEX (HH)
Jan’17 – Oct'17	Natural gas – collar	10,000 MMBtu/day	$2.75 - $2.95	IF – NYMEX (HH)
Jul’16 – Dec'16	Natural gas – three-way collar	13,500 MMBtu/day	$2.70 - $2.20 - $3.26	IF – NYMEX (HH)
Jan’17 – Dec'17	Natural gas – three-way collar	15,000 MMBtu/day	$2.50 - $2.00 - $3.32	IF – NYMEX (HH)
Jul’16 – Sep'16	Crude oil – swap	1,000 Bbl/day	$48.45	WTI – NYMEX
Jul’16 – Sep'16	Crude oil – collar	2,450 Bbl/day	$44.44 - $52.46	WTI – NYMEX
Oct’16 – Dec'16	Crude oil – collar	1,450 Bbl/day	$47.50 - $56.40	WTI – NYMEX
Jul’16 – Dec'16	Crude oil – three-way collar	700 Bbl/day	$46.50 - $35.00 - $57.00	WTI – NYMEX
Jul’16 – Dec'16	Crude oil – three-way collar ⁽¹⁾	700 Bbl/day	$47.50 - $35.00 - $63.50	WTI – NYMEX
Jan’17 – Dec'17	Crude oil – three-way collar	750 Bbl/day	$50.00 - $37.50 - $63.90	WTI – NYMEX

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(1)	We pay our counterparty a premium, which can be and is being deferred until settlement.

After June 30, 2016, we entered into the following derivatives:



Term	Commodity	Contracted Volume	Weighted Average Fixed Price	Contracted Market
Jan’17 – Oct'17	Natural gas – collar	10,000 MMBtu/day	$3.00 - $3.24	IF – NYMEX (HH)

The following tables present the fair values and locations of the derivative transactions recorded in our Unaudited Condensed Consolidated Balance Sheets:



		Derivative Assets
		Fair Value
	Balance Sheet Location	June 30, 2016		December 31, 2015
		(In thousands)
Commodity derivatives:
Current	Current derivative asset	$	—	$	10,186
Long-term	Non-current derivative asset	—		968
Total derivative assets		$	—	$	11,154



		Derivative Liabilities
		Fair Value
	Balance Sheet Location	June 30, 2016		December 31, 2015
		(In thousands)
Commodity derivatives:
Current	Current derivative liability	$	9,646	$	—
Long-term	Non-current derivative liability	3,420		285
Total derivative liabilities		$	13,066	$	285

If a legal right of set-off exists, we net the value of the derivative transactions we have with the same counterparty in our Unaudited Condensed Consolidated Balance Sheets.

Effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations for the three months ended June 30:



Derivatives Instruments	Location of Loss Recognized in Income on Derivative	Amount of Loss Recognized in Income on Derivative
		2016			2015
		(In thousands)
Commodity derivatives	Gain (loss) on derivatives ⁽¹⁾	$	(22,672	)	$	(1,919	)
Total		$	(22,672	)	$	(1,919	)

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(1)	Amounts settled during the 2016 and 2015 periods include gains of $5.1 million and $10.1 million, respectively.

Effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30:



Derivatives Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		2016			2015
		(In thousands)
Commodity derivatives	Gain (loss) on derivatives ⁽¹⁾	$	(11,743	)	$	4,667
Total		$	(11,743	)	$	4,667

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(1)	Amounts settled during the 2016 and 2015 periods include gains of $12.2 million and $21.1 million, respectively.